Structural Risks in Leveraged Restructurings Involving Special Purpose Entities (SPEs): Governance Failures and Creditor Conflicts Threaten Value Recovery in Chapter 11 Cases

The rise of leveraged restructurings in recent years has exposed a critical vulnerability in corporate finance: the structural risks embedded in Special Purpose Entities (SPEs). These off-balance-sheet vehicles, designed to isolate financial obligations, often become focal points of governance failures and creditor conflicts during Chapter 11 proceedings. As recent cases demonstrate, such conflicts can delay restructurings, erode stakeholder trust, and undermine value recovery. Investors and creditors must now grapple with the implications of these systemic weaknesses, particularly as courts increasingly face requests for independent oversight to address asymmetries of power.

Governance Failures and the Fracturing of Creditor Consensus

The Swedish debt collector Intrum AB's Chapter 11 restructuring in Texas underscores the tension between majority rule and minority rights. Despite securing support from 82% of creditors, the court-confirmed plan faced objections from dissenting bondholders who argued the company's financial stability rendered reorganization unnecessary. This case highlights a recurring theme: when SPEs are leveraged to restructure debt, governance failures-such as opaque decision-making or perceived self-dealing-can fracture creditor consensus.

Aerospace supplier Incora's prolonged bankruptcy saga offers another cautionary tale. For years, creditors disputed a controversial financing maneuver that realigned repayment priorities, ultimately requiring judicial intervention to resolve. The absence of clear governance protocols in SPEs allowed conflicting interpretations of contractual terms to fester, prolonging the process and increasing costs. Meanwhile, iLearningEngines' voluntary Chapter 11 filing in Delaware, while less contentious, still illustrates the operational complexities of managing SPEs during restructurings.

UMB Bank's Push for Independent Oversight: A Response to Systemic Risks

The most recent and instructive example comes from First Brands Group, where UMB Bank has demanded the appointment of an independent trustee to oversee $1.1 billion in rescue financing tied to SPEs. The bank argues that First Brands' advisers cannot remain impartial due to overlapping obligations to company creditors and SPE lenders, creating a conflict of interest that threatens equitable asset distribution. This motion reflects a growing recognition that traditional governance structures in Chapter 11 are ill-equipped to handle the intricacies of off-balance-sheet financing.

UMB's request mirrors similar moves in other high-profile cases. For instance, American Signature, Inc. appointed an Independent Director with legal counsel to ensure transparency during its Chapter 11 process. Such interventions aim to restore creditor confidence by insulating asset management from potential biases. However, they also signal a broader trend: as SPEs become more prevalent in leveraged restructurings, courts are increasingly compelled to impose external oversight to mitigate governance risks.

Implications for Investors and the Future of Off-Balance-Sheet Financing

For investors, the lessons are clear. Off-balance-sheet structures, while useful for risk isolation, amplify vulnerabilities during distress. SPEs often lack the governance frameworks of parent entities, making them susceptible to mismanagement or strategic manipulation. Conflicting creditor interests-such as those seen in First Brands-can further complicate value recovery, as stakeholders jockey for favorable repayment terms.

The demand for independent trustees, as seen in UMB's motion, suggests a shift toward proactive governance reforms. Investors should scrutinize the transparency of SPE-related disclosures and advocate for mechanisms that prevent conflicts of interest. Additionally, they must recognize that the presence of SPEs in a restructuring plan does not guarantee success; rather, it introduces layers of complexity that require vigilant oversight.

Conclusion

The structural risks in leveraged restructurings involving SPEs are not merely technical but deeply systemic. Governance failures and creditor conflicts, as evidenced in recent Chapter 11 cases, threaten to erode the very value these restructurings aim to preserve. While courts and creditors are beginning to address these issues through independent oversight, the broader implications for off-balance-sheet financing remain unresolved. For investors, the path forward lies in demanding greater transparency and institutional safeguards-before the next crisis exposes these vulnerabilities once more.